{"id":50511,"date":"2014-05-05T17:02:50","date_gmt":"2014-05-05T21:02:50","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=50511"},"modified":"2014-05-05T17:02:50","modified_gmt":"2014-05-05T21:02:50","slug":"outside-the-box-is-there-a-biotech-bubble","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2014\/05\/05\/outside-the-box-is-there-a-biotech-bubble\/","title":{"rendered":"Outside the Box: Is There a Biotech Bubble?"},"content":{"rendered":"<h4><span style=\"font-size: small;\">By John Mauldin<\/span><\/h4>\n<div class=\"body\"><img style=\"float: right; margin: 15px 0 15px 15px;\" alt=\"\" \/>&nbsp;<\/p>\n<p>I\u2019m bringing you a special <em>Outside the Box<\/em> today to address a very specific question that is on many investor\u2019s minds: is there a bubble in biotech? To answer that question, Patrick Cox, editor of Mauldin Economics\u2019 <a href=\"http:\/\/www.mauldineconomics.com\/go\/v2ki4-2\/PIP\"><em>Transformational Technology Alert<\/em><\/a>, teases apart the data on stock performance in the biotech space and then goes beyond the data to show us how the unique characteristics of the sector bear on the question of bubble or no bubble.<\/p>\n<p>The answer isn\u2019t a simple yes or no, but Patrick\u2019s clear, deeply informed perspective can help us make smart investment decisions in an industry where both gains and losses can be precipitous and outsized.<\/p>\n<p>Your ready and willing to be transformed analyst,<\/p>\n<p class=\"signature\"><em>John Mauldin, Editor<br \/>\nOutside the Box<\/em><a href=\"mailto:subscribers@mauldineconomics.com\">subscribers@mauldineconomics.com<\/a><\/p>\n<p class=\"signature\">\n<div style=\"width: 80%; font-family: Arial,sans-serif; font-size: 16px; margin: 20px auto; background: #e9eced; -moz-border-radius: 10px; -webkit-border-radius: 10px; -khtml-border-radius: 10px; border-radius: 10px; padding: 10px; clear: both; margin-top: 5px; color: #333; text-align: center; line-height: 100%;\">\n<p style=\"font-family: Arial, sans-serif; text-align: center; font-size: 18px; color: #0b507c; line-height: 130%;\">Stay Ahead of the Latest Tech News and Investing Trends&#8230;<\/p>\n<p style=\"margin-bottom: 1em;\"><span style=\"color: #0b507c;\"><span style=\"text-decoration: underline;\"><a href=\"http:\/\/www.mauldineconomics.com\/go\/v2km5-2\/PIP\">Click here to sign up for Patrick Cox\u2019s free daily tech news digest<\/a>.<\/span><\/span><\/p>\n<p>Each day, you get the three tech news stories with the biggest potential impact.<\/p>\n<\/div>\n<hr \/>\n<h3><strong>Is There a Biotech Bubble?<\/strong><\/h3>\n<p><strong>By Patrick Cox, Editor, <em>Transformational Technology Alert<\/em><\/strong><\/p>\n<p>FDA approvals for new drugs have accelerated over the last few years.<\/p>\n<p>In 2013 alone, the FDA approved 27 new drugs. That followed a banner year in 2012, in which 39 novel drugs were approved\u2014the most in 15 years.<\/p>\n<p>Demographic trends will support the need for continued growth in the sector for years to come, as the aging US population increases demand for pharmaceuticals and other healthcare services. However, is this new paradigm enabling the growth potential of biotech firms or fueling the fire of yet another bubble?<\/p>\n<h4><strong>A Brief History Lesson<\/strong><\/h4>\n<p>The S&amp;P 500\u2032s biotech stocks are up more than 250% from the March 2009 bottom, versus a gain of roughly 180% for the rest of the market. This figure\u2014although staggering on its own\u2014does not include the hundreds of small- and mid-cap biotechs that have gone up even more.<\/p>\n<p>The Nasdaq Biotechnology Index, which does include some of these smaller names, gained 66% last year, double the S&amp;P 500\u2032s return. In fact, biotech was the #1 performing sector in each of the last three years.<\/p>\n<p><img decoding=\"async\" style=\"width: 495px; height: 359px;\" src=\"https:\/\/d21uq3hx4esec9.cloudfront.net\/uploads\/newsletters\/Image_1_20140505_OTB.gif\" alt=\"\" \/><\/p>\n<p>Since 2012, biotech stocks also began a full-scale invasion and colonization of the healthcare sector.<\/p>\n<p>For comparison, here\u2019s a look at the percentage of biotech market-cap weighting in the healthcare sector SPDR (XLV) by year:<\/p>\n<table border=\"1\" width=\"434\" cellspacing=\"0\" cellpadding=\"0\">\n<tbody>\n<tr>\n<td style=\"width: 434px; height: 36px;\" colspan=\"2\">Percentage Weighting of Biotechnology Stocks in Healthcare Sector SPDR (ARCX:XLV)<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 254px; height: 17px;\">\n<p align=\"center\">March 2010<\/p>\n<\/td>\n<td style=\"width: 180px; height: 17px;\">\n<p align=\"center\">11.62%<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 254px; height: 17px;\">\n<p align=\"center\">March 2011<\/p>\n<\/td>\n<td style=\"width: 180px; height: 17px;\">\n<p align=\"center\">9.60%<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 254px; height: 17px;\">\n<p align=\"center\">March 2012<\/p>\n<\/td>\n<td style=\"width: 180px; height: 17px;\">\n<p align=\"center\">10.65%<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 254px; height: 17px;\">\n<p align=\"center\">March 2013<\/p>\n<\/td>\n<td style=\"width: 180px; height: 17px;\">\n<p align=\"center\">14.44%<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 254px; height: 17px;\">\n<p align=\"center\">March 2014<\/p>\n<\/td>\n<td style=\"width: 180px; height: 17px;\">\n<p align=\"center\">19.00%<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div style=\"clear: both;\"><\/div>\n<p>The pace of biotech stock growth is accelerating, but this isn\u2019t enough evidence to say that we\u2019re in a bubble. To properly label biotech\u2019s rise and fall, let\u2019s look at how the performance came about in the first place.<\/p>\n<p>Numbers are being tossed about to show very high total returns, but they ignore the preceding sluggish period.<\/p>\n<p>As shown below, biotechs were one of the laggard groups in the 2009-2011 period, outperformed handily by the Nasdaq Index, where the majority of biotech firms trade:<\/p>\n<p><img decoding=\"async\" style=\"width: 589px; height: 428px;\" src=\"https:\/\/d21uq3hx4esec9.cloudfront.net\/uploads\/newsletters\/Image_2_20140505_OTB.gif\" alt=\"\" \/><\/p>\n<p>The chart above shows how the boom can be broken down into three phases:<\/p>\n<ul>\n<li>2009-2011 = underperformance<\/li>\n<\/ul>\n<ul>\n<li>\u00a02012 = catch-up performance<\/li>\n<\/ul>\n<ul>\n<li>\u00a02013-recent = outperformance.<\/li>\n<\/ul>\n<p>From 2009 through 2011, there was little to no public market capital for anything remotely risky, and so young biotech companies were forced to sell out to larger drug companies on the private market. This makes sense, as valuations on the private market were actually much better.<\/p>\n<p>Meanwhile, as sluggish global growth persisted, investors began to favor large-cap biotech companies, such as Gilead, Pfizer, and Amgen. Unfortunately, there weren\u2019t enough reputable biotech franchises to go around, thanks to a period of industry consolidation that included a buyout of Genentech by Roche for $46.8 billion, Merck acquiring Schering-Plough for $41.0 billion, and Sanofi taking over Genzyme for $20.0 billion, coupled with a shortage of public offerings. All the while, institutions took the remaining large biotech stocks to all-time highs.<\/p>\n<h4><strong>Spreading the Wealth<\/strong><\/h4>\n<p>In most markets, there are examples of both huge winners and terrible losers, and biotechnology is no different.<\/p>\n<p>Here\u2019s what the distribution of returns looks like for 172 US biotechs with a 12-month performance return:<\/p>\n<p><img decoding=\"async\" style=\"width: 552px; height: 401px;\" src=\"https:\/\/d21uq3hx4esec9.cloudfront.net\/uploads\/newsletters\/Image_3_20140505_OTB.gif\" alt=\"\" \/><\/p>\n<p>While there were many small companies with monstrous returns, the returns were widely distributed, suggesting that this market is more selective than we would expect from a general bubble. However, it remains possible that many of these individual companies carry inflated valuations.<\/p>\n<h4><strong>IPOs<\/strong><\/h4>\n<p>In the first quarter this year, there were about 50 IPOs; 45% of these offerings were for pre-profit biotechnology companies. In other words, they all lost money, yet they were valued at a median of $199 million.<\/p>\n<p>Half of those biotech IPOs had no revenue at all. For those that did have some, the median 12-month sales amounted to only $200,000. That compares with median revenue of $125 million for non-biotechs with initial offerings.<\/p>\n<p>However, although this may look fishy to the untrained eye, it\u2019s not unusual for a small biotech company to have no earnings or revenue, as the company\u2019s value is derived from potential future earnings and revenue from a product that\u2019s currently in development.<\/p>\n<p>That said, the bubbly part of this IPO market is that the average gain for these new biotech offerings is over 50%.<\/p>\n<p>There has also been a spike in deal activity: last quarter M&amp;A in the life-sciences sector spiked 24%, as 31 companies were bought for a total of $37 billion.<\/p>\n<p>So yes, 2013 was a banner year for biotechnology IPOs\u2014there\u2019s no denying that. But when you look at the long-run trend, biotechs had been depressed for a decade. The truth is that there are hundreds of small startup companies that have great ideas, great products, and great futures, but they have yet to go public.<\/p>\n<p>What\u2019s lost in the hubbub about all these new IPOs soaring are two things:<\/p>\n<ul>\n<li>First, a lot of them have gone down in value, not up.<\/li>\n<\/ul>\n<ul>\n<li>Second, and more importantly, the surge in IPOs only reflects the shortage of biotech IPOs in the last 10 years. 35 or so IPOs in one year for biotechs may seem like a lot, but averaged out over the last 10 years, it\u2019s nothing. Predictions are for another 35-40 to go public in 2014, for an annual total of almost 100.<\/li>\n<\/ul>\n<p>From these mostly small, focused companies can come blockbuster, patented products. Once a privately funded biotech has reached a certain level in its development, an IPO can furnish it with the funds necessary to move through the next stages. Not all of these companies will be successful, but for the ones that are, the payoff can be large\u2014even enormous\u2014and that\u2019s what keeps investors interested and willing to pay a premium for the opportunity.<\/p>\n<h4><strong>Valuing the Biotech Market: One Size Does Not Fit All<\/strong><\/h4>\n<p>Here\u2019s the big picture via Brendan Conway of <em>Barron<\/em><em>\u2019<\/em><em>s:<\/em><\/p>\n<p style=\"margin-left: .5in;\">\u201cThe price-earnings ratio of the SPDR S&amp;P Biotech ETF is a rich 33 times trailing earnings, versus the S&amp;P 500\u2032s 17, says Morningstar. But Morningstar removes unprofitable firms from the tally. Add them back in and tally the losses against the prices, and the P\/E multiple would be a negative 19, according to ETF.com\u2019s Matt Hougan\u2013if such a thing were possible.\u201d<\/p>\n<p>Some companies look more expensive and some look more reasonable today, compared to 2000. The real challenge with these companies is whether or not they\u2019ll be successful in pushing their products through the pipeline and into the market.<\/p>\n<p>Based on earnings forecasts, large-cap biotech companies including Amgen, Celgene, and Gilead are trading at 13.5x 2016 earnings and 11.7x 2017 earnings, which is cheaper than 14.2x and 13.5x, respectively, for the S&amp;P 500. Of course, these are based on the assumption that the biotechs will recognize 21.5% annual earnings growth through 2017, versus 5.5% for the S&amp;P 500\u2014and both of these assumptions may prove to be too optimistic.<\/p>\n<p>However, biotechs are often improperly \u201cgroup analyzed.\u201d Each company is in its own mini-field, at its own development stage, with its own potential return and risk outlook. Most currently listed biotechs have some sales, but few have positive earnings. Yet we read that the stocks are overpriced because the average P\/E ratio is high. Here are the key statistics:<\/p>\n<ul>\n<li>All listed US biotechs = 215<\/li>\n<\/ul>\n<ul>\n<li>Some sales = 173 (80%)<\/li>\n<\/ul>\n<ul>\n<li>Meaningful sales (a price\/sales ratio of 10 or less) = 45 (21%)<\/li>\n<\/ul>\n<ul>\n<li>Positive current earnings = 29 (13%)<\/li>\n<\/ul>\n<ul>\n<li>Positive estimated (forward) earnings = 35 (16%).<\/li>\n<\/ul>\n<p>There\u2019s a wide disparity among the 215 companies. Looking at market capitalizations, we can see a great divide between the few mega- and numerous mini-biotechs:<\/p>\n<p><img decoding=\"async\" style=\"width: 581px; height: 395px;\" src=\"https:\/\/d21uq3hx4esec9.cloudfront.net\/uploads\/newsletters\/Image_4_20140505_OTB.gif\" alt=\"\" \/><\/p>\n<p>More to the point is the relationship between market cap and earnings yield (E\/P). This graph shows the great number of money-losing, smaller biotechs.<\/p>\n<p><img decoding=\"async\" style=\"width: 600px; height: 409px;\" src=\"https:\/\/d21uq3hx4esec9.cloudfront.net\/uploads\/newsletters\/Image_5_20140505_OTB.gif\" alt=\"\" \/><\/p>\n<p>Clearly, using a one-size-fits-all traditional industry analysis and valuation comparisons misjudges biotechs. Each company must be analyzed individually, as no two companies are addressing the same market with the same product and the same stage in their development.<\/p>\n<p>But as a whole, the biotech sector still looks attractive when factoring in its growth potential. The price-to-earnings growth ratio (which is similar to earnings per share; however, it takes earnings growth into account) for biotech is around 0.7, around half the value of the S&amp;P 500.<\/p>\n<h4><strong>Broader Market Implications<\/strong><\/h4>\n<p>Growth stocks are on their own tracks and will proceed according to their own developments and investor views.<\/p>\n<p>In short, it\u2019s beginning to look a lot like 1999 or early 2000, but not for the whole market or large-cap stocks. Those crucial areas could be overvalued after five years of enormous gains, but the numbers suggest that the overall Standard &amp; Poor\u2019s 500-stock Index compares favorably with the stratospheric prices that investors routinely paid in 2000.<\/p>\n<p>In 2000, for the 10 biggest stocks in the S&amp;P 500 by market cap, the P\/E ratio was 62.6. Today, the comparable figure is only 16.1. Back in March 2000, Cisco had the highest P\/E ratio among the 10 biggest stocks, at 196.2, followed by Oracle, at 148.4. Those figures were so high that when sentiment turned, the stocks plummeted.<\/p>\n<p>Today, only one stock in the big 10 has a P\/E above 30: Google, the sole Internet company in the group. Its P\/E is 33, double the current average for the S&amp;P 500\u2019s 10 biggest companies, but compared with the levels that prevailed in 2000, it\u2019s reasonably priced. If earnings grow rapidly, Google could conceivably be profitable for investors at its current valuation.<\/p>\n<p>The point is that even if prices are high in the overall market, they\u2019re being backed up by earnings to a much larger extent than in 2000. That\u2019s important, because\u2014as I\u2019m sure many of you remember\u2014when the dot-com bubble burst, the downdraft brought most companies down with it.<\/p>\n<h4><strong>Moving Forward<\/strong><\/h4>\n<p>Many of our subscribers have written to us asking how the most recent selloff will affect our analysis moving forward.<\/p>\n<p>In short, not at all. We examine individual companies based on the merits of their technology. We evaluate the potential market value of their products and adjust for the probability that they\u2019ll pass through clinical trials based on their particular stage of development. This results in a highly defensible valuation for the company that changes as the company\u2019s products move through clinical trials.<\/p>\n<p>The important factor that many analysts ignore is the probability for a product\u2019s success, which varies by the clinical trial phase and therapeutic area. This, among other factors, is how many of the high valuations have been justified.<\/p>\n<p>Our analysis, however, remains grounded in reality. Even the best companies can be priced too high or too low, and our recommendations focus on the best companies with the best risk-adjusted returns.<\/p>\n<p>This, in our view, is the only way to come to a realistic valuation in this unique market.<\/p>\n<p style=\"margin-left: .5in;\">&#8211; Patrick Cox, Senior Editor, <a href=\"http:\/\/www.mauldineconomics.com\/go\/v2kq6-2\/PIP\"><em>Transformational Technology Alert<\/em><\/a><\/p>\n<p style=\"margin-left: .5in;\">&#8211; Robert Ross, Senior Analyst, Mauldin Economics<\/p>\n<p style=\"margin-left: .5in;\">&#8211; Andrew Wagner, Analyst, Mauldin Economics<\/p>\n<p align=\"center\">&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;-<\/p>\n<p>If you\u2019d like to learn more about Mauldin Economics\u2019 <em>Transformational Technology Alert<\/em>, the groundbreaking advisory in which Patrick Cox leverages his 30+ years of industry research experience to identify promising development stage technology firms, <a href=\"http:\/\/www.mauldineconomics.com\/go\/v2kb7-2\/PIP\">click here<\/a>.<\/p>\n<p>You can start a risk-free trial of Patrick\u2019s work today and preview his ability to find the tech and biotech plays with the potential to radically alter both the markets and society. It\u2019s fascinating reading, and once again, you can learn more about Patrick\u2019s research and trial his service risk-free for 90 days by clicking the link above.<\/p>\n<p><strong>Like\u00a0<em>Outside the Box?<\/em><br \/>\n<span style=\"text-decoration: underline;\"><a href=\"http:\/\/www.mauldineconomics.com\/go\/v2ke8-2\/PIP\">Sign up today<\/a><\/span> and get each new issue delivered free to your inbox.<br \/>\nIt&#8217;s your opportunity to get the news John Mauldin thinks matters most to your finances.<\/strong><\/p>\n<p><span style=\"font-size: 9px;\">\u00a9 2013 Mauldin Economics. All Rights Reserved.<\/span><br \/>\n<span style=\"font-size: 9px;\"><em>Outside the Box<\/em>\u00a0is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. 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WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor\u00e2\u20ac\u2122s interest in alternative investments, and none is expected to develop.<\/span><\/p>\n<\/div>\n<div id=\"xvMdV95u77zU\" style=\"clear: both;\">The article <a href=\"http:\/\/www.mauldineconomics.com\/go\/v2kze-2\/PIP\" rel=\"permalink\">Outside the Box: Is There a Biotech Bubble?<\/a> was originally published at <a href=\"http:\/\/www.mauldineconomics.com\/go\/v2jkf-2\/PIP\">mauldineconomics.com<\/a>.<\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n<div style=\"clear: both;\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p>By John Mauldin &nbsp; I\u2019m bringing you a special Outside the Box today to address a very specific question that is on many investor\u2019s minds: is there a bubble in biotech? To answer that question, Patrick Cox, editor of Mauldin Economics\u2019 Transformational Technology Alert, teases apart the data on stock performance in the biotech space &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/forex-news\/2014\/05\/05\/outside-the-box-is-there-a-biotech-bubble\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Outside the Box: Is There a Biotech Bubble?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-50511","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/50511","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=50511"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/50511\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=50511"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=50511"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=50511"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}